Analysts predict Tesco discount

Investors have been growing increasingly nervous about Tesco's Christmas trading update, due this morning.

Yesterday the supermarket group's shares slipped 6p to 420p in a rising market, on worries that Sainsbury's or a revived Morrisons could be taking market share from the business. On top of that came reports that Wal-Mart had plans to hit back at Tesco's new US operation.

Analysts at Morgan Stanley - while making a point of praising the company - cut their price target from 480p to 375p and their recommendation from overweight to underweight.

"We don't question Tesco's defensiveness, growth or quality," they said. "However, even great companies don't outperform every year, and Tesco has underperformed the FTSE 100 in three of the last 10 years. We think that 2008 will prove to be another such year." It added that Tesco had historically performed badly during times of falling interest rates.

Nick Bubb, at Pali International, said: "The market seems confident Tesco will deliver around 4% like-for-like, excluding petrol, in the UK over the Christmas period, but we wouldn't be so sure of that if the weak December TNS/Nielsen data for Tesco is to be believed. Unless the like-for-like outcome is boosted by the inclusion of the early January period or by the growth of Tesco Direct, we wouldn't be surprised by an outcome of nearer 3%, which would be a big miss in food retailing terms."

The department store group Debenhams, which also reports today, fared better. Its shares added 8.75p to 76.5p, lifted by last week's news that Milestone Resources had raised its stake from 7.9% to 8.39%. Milestone is headed by Micky Jagtiani, the boss of Dubai retailer Landmark.

The semiconductor designer Arm Holdings dipped 0.25p to 108p after a reduce note from Dresdner Kleinwort. But there was a revival of an old bid tale, with suggestions that representatives of a US group - perhaps Intel - were in the country to talk about an offer of up to 190p a share. Intel was linked with Arm a few years ago but analysts pointed out that since then it had developed its own products to compete with Arm. It is also a customer of Arm, so meetings between the two would not be unheard of.

Overall, it was a fairly buoyant start to the week, with the FTSE 100 up 13.7 points at 6215.7 and the FTSE 250 index 201.8 points better at 10,031.6.

Property companies were wanted, helped by a positive note from Lehman Brothers. The bank said the recent falls in the sector had been overdone and it was due a rebound. "We prefer quality names like Hammerson (with a target price of £13.67) and Land Securities (£18.51p)," said Lehman. "A possible significant catalyst will likely be sector consolidation, where we think there could be considerable interest in Hammerson's underlying asset base."

Hammerson was the best performer in the 100 index, up 86.5p to £10.20, while Land Securities added 54p to £15.16. Housebuilders also benefited, with Persimmon 47.5p higher at 739p and Taylor Wimpey 6.2p better at 172.5p.

Banks were mixed after Credit Suisse cut its price targets across the board. But it said Barclays, up 15p to 480.5p, looked interesting and set a 635p target.

Northern Rock fell 4.75p to 82.5p as nationalisation came a step closer and Collins Stewart issued a sell note.

The spread-betting group IG Index and the construction and engineering group Balfour Beatty both issued positive statements but saw their shares fall. IG lost 32.25p to 360.25p, despite a 60% rise in underlying half-year profits on concern about a slowdown in the second half. Balfour ended 13p lower at 458.25p. It said full-year results would be at the top end of expectations, but Citigroup cut its target price from 450p to 420p.

"We believe that Balfour's relatively strong performance leaves it vulnerable to a sell-off," Citi said. "The rating is expensive relative to its history, to its UK peers and to its European peers."

Lower down the market, the pharmaceutical group Meldex International jumped 29.25p to 83.25p after it said it had received a takeover approach. Aquisitek recently declared an 8.19% stake.

But the finance group Davenham, down 4p at 207.5p, could be under pressure today. After the market closed last night, the investment group ACP withdrew its offer for the firm. Davenham had rejected the bid and, said ACP, had refused to give enough information.

Finally, a savage sell note from analysts at Daniel Stewart sent shares in Silverjet plunging 14p to 35.5p. The broker said: "Our target price is nil. We would sell at any price." It suggested rising fuel costs would hit the company hard, and it was likely to need another fundraising to stay in business. But the business airline said the broker's 32-page analysis contained "numerous material mistakes and inaccuracies" and said it was in a strong position: "Silverjet remains very confident that it will continue to deliver on its strategy and revolutionise the way passengers fly long-haul business profitably."